Perfunctory obligations, incidental obligations and marketing incentives

The Boards continued their discussions on revenue recognition from Wednesday. The Exposure Draft did not include specific guidance on inconsequential or perfunctory obligations as contained in U.S. GAAP's ASC 605-10-S99. A few comment letter respondents requested retaining the guidance on incidental or perfunctory obligations in the final Standard.

That guidance provides that if an entity's remaining performance obligation is inconsequential or perfunctory then the entity could conclude it has met the delivery or performance criteria. A few respondents also commented that entities should not identify separate performance obligations for goods and services provided as marketing incentives. Additionally, a few respondents (primarily from the telecommunications industry) requested that incidental obligations be excluded in identifying the performance obligation (e.g., discounted headsets with contract service).

However, the Board tentatively agreed to retain their prior decision in the Exposure Draft not to provide specific guidance related to incidental or perfunctory obligations or marketing incentives. For inconsequential or perfunctory obligations, the Boards had concerns over the view that some have which equates inconsequential or perfunctory obligations to a materiality assessment. They also felt that incorporating guidance on inconsequential or perfunctory obligations may also require including guidance on costing. For marketing incentives, the Boards felt that all goods and services provided to a customer give rise to performance obligations as they were a component of the negotiated exchange with the customer. And finally, with respect to incidental obligations, the Boards felt that the concerns here primarily related to the allocation of revenue which will be addressed when the Boards discuss allocation of the transaction price.

Determining the transfer of goods and services

The Boards also continued their discussions from Wednesday on determining the criteria for a performance obligation being a service rather than a good. The staffs provided the Boards with revised language on the description of a service. Yesterday, the staffs proposed criteria for a performance obligation being a service if any of the following exist:

• the task would not need to be reperformed if the obligation were transferred to another entity
• the customer owns the work-in-process, or
• the performance of the task would not create an asset independent of the contract and the customer cannot avoid paying for performance of the task.

The staffs' revised language changes the criteria for work-in-process from "owns" to "controls" and added to the criteria of avoiding payment to read "the customer cannot avoid paying for performance of the task to date".

The Boards discussed the revised criteria provided by the staffs. The discussion was intended to focus solely on the criteria of what performance obligations represent a service; however, the Boards had difficulty in separating the discussion between what constitutes a service and over what period revenue should be recognised. The Boards used various examples in their discussion but primarily focused on the example of a financial statement audit engagement because of the fact the tangible "benefit" being transferred to the client only occurs at the end of the engagement when the audit opinion is issued. However, many Board members felt that benefits were actually being provided throughout the engagement period. The Board eventually took a poll to gauge views on the example of the audit engagement and whether revenue should be recognised as a continuous transfer of benefit or whether revenue should only be recognised upon the eventual benefit of the issuance of the audit opinion. A majority of both Boards were in favour of the continuous transfer of benefit approach with one FASB member and three IASB members instead believing that revenue should not be recognised until the end of the engagement. The FASB member with this view clarified that he viewed the audit opinion as the delivery of a good rather than delivery of a service under the criteria provided by the staffs.

The staffs will take the feedback provided during the two days of discussions to further refine the criteria around a service and will bring the issue back to the Boards at a future meeting.